Dani Rodrik on Premature Industrial Death in the Global South

We are used to thinking about deindustrialization as a problem of rich nations. The former centers of manufacturing in the Global North are turning into deserted rustbelts. Simply put, the factory jobs are moving to China. If not China, the jobs go to other cheap production centers in Asia. Former industrial powerhouses such as the American Midwest, upper-state New York, Lancashire and the Northeast of Britain, Pas-de-Calais in France, Wallonia in Belgium and the Ruhr in Germany have become centers of unemployment and poverty. Former steel mills, auto plants and metal fabrication are shuttered; the jobs that are left are jobs in the service sector – some lucrative, some not. The standard interpretation of this was because jobs were moving from the United States and Europe to Asia, and while this may have been a loss for the rich nations of the world, it was a gain for the poor nations of the world, because they were enjoying increased manufacturing employment.

Wrong.

Dani Rodrik argued in a seminal article in the 2016 Journal of Economic Growth titled “Premature Deindustrialization” that deindustrialization was a bigger problem for the poor nations of the world than the rich nations of the world. Nearly every economy, with the exception of the Asian economies and a small handful of successful manufacturing exporters, were losing industrial jobs. Worse, they were losing jobs at an earlier stage of their development, where the effects of these losses would be far more catastrophic than those experienced by the wealthy economies. The damage being done to places like Michigan and Northumberland is mild compared to the damage done to places like the ABCD, the automobile belt in São Paulo industrial suburbs.

       

It is well known that over the course of development the share of manufacturing in a country’s economy first rises and then falls. Before industrialization, most economic activities are agricultural. The development of factories moves workers off the farm and into manufacturing. Later on, economies develop a service sector. These can involve poorly paid jobs in retail or restauranting or more lucrative jobs in software development, medicine, or finance. Advances in technology move more jobs into the information intense sector, reducing the share of manufacturing in employment. In theory, all of this should be normal. None of these changes should be pathological in any way.

    

It is not good if the high manufacturing phase ends early. Economies can grow just as well from agriculture, manufacturing or services. Australia got rich exporting wool, an agricultural product. The United States has a thriving service sector that includes Wall Street, Hollywood, superlative hospitals and the finest university system in the world. So moving to non-manufacturing does not hurt GDP growth per se.

    

Rodrik argues that moving to non-manufacture does hurt poverty reduction. Manufacturing is unique in its ability to provide upward mobility and high incomes to lower class workers with low levels of education. Agricultural work is poorly paid. Good service sector jobs require an education. A poor man or woman who is hard working and good with his or her hands can make good money in a factory. From a humanitarian standpoint, manufacturing offers the best opportunities for raising standards of living.

    

Unfortunately, the percentage of economic activity in manufacturing has dropped off prematurely in nearly all of the Global South except Asia. The share of economic activity in manufacture has declined continuously in the United States, Western Europe, Latin America and the Caribbean and Subsaharan Africa. It has grown in Asia and has grown exponentially in China.

    

Worse, the peak that Latin America attained was far lower than the cresting point in the United States and Western Europe. In the Developed West, most nations had 25% of their labor force in manufacturing before the fall. Latin America had 6% of its labor force in manufacturing. Africa had 1% of its labor force in manufacturing. If Rodrik is right, what this means is that Latin America and Sub Saharan Africa will never attain the high percentage of their labor force in manufacturing that has been a normal part of the development process in the West.

    

Why is manufacturing falling? In theory, this can be due to greater productivity and the substitution of capital for labor in manufacturing, reducing the number of workers involved. Rodrik finds that some of this is occurring in the United States and Europe.

    

But the dominant factor is the simple shift of production from the other nations to Asia. The Asian combination of cheap labor, good infrastructure, high skills and low production costs allows China and East Asia to simply outcompete most other manufacturing locations. It is cheaper to make your products in China.

    

The United States and Western Europe were not hurt too badly by this. Even though the percentage of the labor force in manufacturing has declined, the percentage of value added in manufacturing has stayed robust. Essentially, the United States and Western Europe had shifted from low value low price manufactures to high value high price manufactures. Fewer workers still produce large amounts of economic value. The United States and Western Europe have moved into the lucrative high-tech sectors, leaving cheap run-of-the-mill manufacture to Asia. So they have suffered little damage from this trend although particular states and regions may have been less effective at making this transition.  

    

The situation is worse in Latin America and Africa. They crested at a far lower level of the percent of the labor force in manufacturing than did the United States and Europe. So a smaller percentage of the poor population in Latin America and Africa got to get the upward mobility associated with manufacturing.

    

This is not a problem that is going to resolve itself with time. Few countries show bounce backs once they have begun to lose manufacturing to Asia. This does not mean Latin America or Africa is necessarily economically dead. Many countries such as Ethiopia or Brazil have developed thriving export agriculture sectors. There is both GDP growth and some wage growth associated with the high end of global agriculture. Likewise, many poor nations, notably in Sub Saharan Africa, are dramatically increasing the educational attainment of their populations. So some shift into either high-tech manufacture or services may be viable.

      

Rodrik notes that there is an escape hatch by which manufacturing can be saved. Countries with strong local manufacturing technology that are capable of competing in global markets are not particularly hurt by the presence of the Chinese. Mauritius in particular has an international reputation in jewelry making. Even though India, China and Switzerland are the top three jewelry exporters globally, Mauritius maintains its own distinctive niche in the sector. The high price that jewelry commands insulates Mauritius against price pressure from other nations; Mauritius is certainly price competitive itself against jewelry made in the United States or Europe.

    

Rodrik also notes that the manufacturing decline has almost exclusively occurred in the low-skill sectors. When he runs his analysis separately for manufacturing employment in low skill, middle skill and high skill sectors, only the low skill sectors show a loss of activity to Asia. High skill industries maintain their employment and value creation both in the Global North and in Europe and America.

   

Manufacturing decline has grim political implications for the Global South. In Europe and the United States, the presence of strong robust manufacturing employment led to the formation of labor unions and labor parties. This not only led to high overall wages, but led to the rise of progressive government policy. Organized workers were able to insist on nationalized health care, employment security and a wide variety of government benefits.

    

Without labor power, it is unlikely that poor people will organize into class based organizations. The most reasonable alternatives are ethnic based mobilization, regional mobilization or crime-based mobilization. Unionism is relatively non-violent. Ethnic mobilization and regional mobilization are the basis of civil wars. Crime-based mobilization leads to its own distinctive forms of political violence.

    

So the decline of manufacture is likely to lead not only to the persistence of poverty but to long term increases in levels of violent conflict in the Global South.

    

It is hard to see how any of this is good.